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Video: Risk Premium Formula & Examples

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  • 0:03 Risk and Reward
  • 1:16 The Needed Variables
  • 3:35 Calculating the Risk Premium
  • 4:28 What Does it All Mean?
  • 4:54 Lesson Summary
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Instructor Adam Gifford

Adam holds an MBA and a MS in Human Resources

Video Summary for Risk Premium Formula

Risk premium is defined as the payout to an investor that's greater than the risk-free payout.

This video explains how to calculate risk premium using a simple formula: Risk Premium = Estimated Return on Investment - Risk-free Rate.

To find the estimated return on investment, you can use either of two approaches:

  • Dividend-based approach: Adding dividend yield and dividend growth
  • Earnings-based approach: Dividing earnings per share by current market price

The risk-free rate is typically based on government savings bonds.

Understanding risk premium helps investors like Alan determine which investments will provide the desired return above the risk-free rate, compensating them for taking on additional risk.

The video provides practical examples calculating risk premium, making it easier to apply this concept to real investment decisions.

Read Risk Premium Formula & Examples Lesson
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